2010 (7) TMI 42 - AAR - Customs

Nature of Import CKD versus SKD complete knocked down versus semi knocked down) import of parts / components of motorcycles - The said parts are proposed to be packed into motorcycle kits. - In general all the parts, components and sub assemblies required to build a standard order quantity of motorcycles would be shipped together. The vehicles would be assembled in India by fastening the various components together in a predefined sequence of operations. The operators will use a combination of hand tools (wrenches, sockets, screw drivers, etc.) and power tools (electric or pneumatic wrenches, nut drivers, drills, guns etc.) in assembling the vehicles. No other process such as machining, fabrication, stamping etc is proposed to be undertaken with respect to imported parts and components. Routine quality checks would be performed during the assembly operations and motorcycles would be released for distribution after final vehicle inspection. Held that - The import of motorcycles Sportster-XL883N and Softail-FLSTC in the form of components, parts and sub assemblies as per the lists filed by the applicant would constitute import of motorcycles in Completely Knocked Down form provided the engine and the transmission assemblies are designed to be housed and are so assembled in a single housing. Eligible for concessional rate of duty

Summary

Issues Involved:
1. Definition and interpretation of "Completely Knocked Down (CKD)" units.
2. Eligibility for concessional rate of basic customs duty under Notification No. 21/2002-Cus.
3. Comparison with the BMW case ruling.
4. Department's objections and interpretation.
5. Impact of the "Auto Policy" on statutory notifications.

Issue-wise Detailed Analysis:

1. Definition and Interpretation of "Completely Knocked Down (CKD)" Units:
The applicant proposed to import motorcycle parts and components for assembly in India and sought a ruling on whether these imports would qualify as CKD units eligible for a concessional customs duty rate. The term "completely knocked down" is not defined under Indian Customs Law or other relevant legislation. The applicant argued that its imports should be considered CKD units, referencing industry practices and the opinion of the Automotive Research Association of India (ARAI). The ARAI concluded that the assemblies represented CKD kits, noting that the assembly processes involved simple mechanical operations without machining or welding.

2. Eligibility for Concessional Rate of Basic Customs Duty under Notification No. 21/2002-Cus:
The applicant sought clarity on whether its imports would qualify for the 10% concessional duty rate under Entry 345 of Notification No. 21/2002-Cus. The relevant entry specifies a 10% duty for motorcycles imported as CKD units and a 60% duty for motorcycles imported in any other form. The applicant argued that its imports, consisting of various sub-assemblies and components, should qualify as CKD units.

3. Comparison with the BMW Case Ruling:
The applicant referenced a previous ruling involving Bayerische Motoren Werke (BMW), where the Authority held that semi-knocked down parts could still qualify as CKD units. The applicant argued that its case was similar and should be treated similarly. The Authority noted that the BMW ruling recognized the industry practice of outsourcing component manufacturing and did not require every part to be unassembled to the last component to qualify as CKD.

4. Department's Objections and Interpretation:
The Department argued that CKD should refer to items that cannot be further dismantled into parts or components. They contested the ARAI's opinion and submitted a Chartered Engineer's opinion stating that the goods were in semi-knocked down condition, not CKD. The Department also emphasized the need for strict interpretation of exemption notifications and argued that the applicant's interpretation would render part of the notification redundant.

5. Impact of the "Auto Policy" on Statutory Notifications:
The Department referred to the "Auto Policy" of 2002, which aimed to develop manufacturing capabilities in India rather than mere assembly. They argued that the policy influenced the duty structure for motor vehicles, with different rates based on the degree of manufacturing required. However, the Authority noted that the Auto Policy could not control the operation of a statutory notification and that there would still be manufacturing activity in India.

Judgment:
The Authority ruled that the import of motorcycles in the form of components, parts, and sub-assemblies as proposed by the applicant would constitute import of motorcycles in CKD form, provided the engine and transmission assemblies are designed to be housed and assembled in a single housing. Consequently, the applicant would be eligible for the concessional duty rate of 10% under Serial No. (1) of Entry 345 of Notification No. 21/2002-Cus. The ruling also applied to other motorcycle models imported in similar forms.

Separate Judgment by Chairperson:
The Chairperson concurred with the ruling, emphasizing the practical interpretation of the term "completely knocked down" and noting that the absence of a precise definition necessitated a practical approach. The Chairperson highlighted the importance of industry practices and the need to avoid an extreme interpretation that would require starting manufacturing from scratch. The Chairperson also referenced the BMW ruling and noted that the Revenue should have amended the notification if it intended to deviate from the established interpretation.